Special Report No. 6/2000 of the Court of Auditors concerning the grant of interest rate subsidies on loans by the European Investment Bank to small and medium­sized enterprises, through its temporary lending facility.

Fifth Report from the Commission on the implementation of the Decision on the provision of Community interest rate subsidies on loans for small and medium­sized enterprises extended by the European Investment Bank under its temporary lending facility (the SME facility).

20.1 Interest rate subsidies are provided under
a variety of Community programmes, such as the MEDA Programme,
run by the Commission and the European Development Fund (EDF).[47]

20.2 The previous Committee left document (a) uncleared
on 4 April 2001, pending publication of the report being considered
by a Council Working Group that would make recommendations to
ECOFIN. The previous Committee also left documents (b) and (c)
uncleared on 14 June and 26 July 2000 respectively, on the grounds
that it wished to consider these documents in conjunction with
the Council Working Group's report.

The documents

20.3 In her letter of 9 May 2001, the then Economic
Secretary to the Treasury (Miss Melanie Johnson) informed the
previous Committee that the Council Working Group had submitted
its recommendations to ECOFIN. The Minister provided the draft
Council conclusions on the Commission's report on interest rate
subsidies[48] together
with the draft Council Conclusions on the Court of Auditors Special
Report 6/2000,[49] which
relate to documents (b) and (c).

20.4 The draft Council Conclusions on the Commission's
report on interest rate subsidies recite the general observations
from the earlier report, identifying weaknesses of interest-rate
subsidies. The main conclusions are:

"In the future, programmes
of interest-rate subsidy should be examined on a case by case
basis evaluating the advantages and disadvantages of this instrument
compared to others like loan guarantees, equity related schemes
or grants. As outlined in the Commission report, the following
conditions should be met if interest-rate subsidies are to remain
fully effective:

strict compliance with state aid legislation;

wide competition between financial intermediaries
in the case of global loans in order to reduce administrative
costs and avoid market distortions;

effective targeting of objectives/beneficiaries;

there should be cost-effective public controls
in order to ensure as much as possible that aid is actually reaching
the intended beneficiary;

the eligibility criteria and programme rules
should be simple, clear and broadly diffused;

programme implementation must generate value
added for national measures (subsidiarity); and

the adequate monitoring and assessment aspects
must be ensured. Programmes should be subject to an ex-ante evaluation,
a mid-term evaluation and an ex-post evaluation."

The Government's view

20.5 In her letter of 9 May 2001, the former Economic
Secretary to the Treasury (Miss Melanie Johnson) says:

"The draft conclusions
on the Commission report acknowledge the positive and negative
aspects of interest rate subsidies as discussed in the report
itself. However, the conclusions note, in paragraph 3, that 'the
Council considers that, in general, the justification for interest
rate subsidies has diminished, but the use of the instrument may
still be justified in specific policy areas and for specific purposes.'

"The final paragraph of the draft conclusions
makes clear that future programmes of interest rate subsidies
should be examined in comparison with other available instruments
and that certain conditions should be met if interest rate subsidies
are to be effective. I consider these conditions to be very important
and believe that the conclusions as a whole should help to ensure
that any future programmes of interest rate subsidies are properly
evaluated and implemented."

Conclusion

20.6 We had hoped that the recommendations from
the Council Working Group to ECOFIN would have been in the form
of detailed operational guidelines, against which the use of interest
rate subsidies could be assessed strictly. In the event, the recommendations
are less rigorous than this and in places seem little more than
a recital of the main observations from the Commission's report.
Having said that, the draft conclusions and recommendations contain
a list of conditions Member States, including the United Kingdom,
could use to object to applications for Community interest-rate
subsidies in the future. Although the documents do not relate
specifically to the use of interest rate subsidies in the European
Union by Member States, the arguments in the documents are likely
to discourage the use of such interest rate subsidies. We have
no further questions and clear all three documents.